How Soon Can I Borrow From My Whole Life Insurance Policy?

Whole life and universal life insurance policies are more expensive than term policies but have no pre-determined expiration date. If sufficient premiums are paid, the policy is in force for the lifetime of the insured. While monthly premiums are higher than term, money paid into the policy that exceeds the cost of insurance builds in a cash value account that’s part of the policy. The cash value offsets the rising cost of insurance as you age, so premiums can remain level throughout life and not rise to unaffordable amounts in your later years.

Potential Pitfalls
Each insurance company will have different rules in place, but in general, the most you can borrow against your life insurance is up to 90% of its cash value.
You can borrow from a life insurance policy as soon as there is enough cash value built up to take a loan in the amount you need. Depending on how your policy is structured, this can take several years to accrue.
You can borrow from permanent life insurance policies that build cash value. These would typically include whole life and universal life (UL) policies. You cannot borrow against a term policy since there is no cash value associated with it.

Policy loans do not affect your credit, and there is no approval process or credit check since you are essentially borrowing from yourself. No explanation is required about how you plan to use the money, so it can be used for anything from bills to vacation expenses to a financial emergency. The loan is also not recognized by the IRS as income, therefore it remains free from tax as long as the policy stays active (provided it’s not a modified endowment contract).

A policy loan reduces your available cash value and death benefit. If you pass while owing money on a life insurance loan, it will reduce the amount your beneficiaries receive. Interest rates are typically much lower than on a bank loan or credit card, and there is no mandatory monthly payment. However, it’s important to pay the loan back in a timely manner, on top of your regular premium payments. If unpaid, interest is added to the balance and accrues, putting your loan at risk of exceeding the policy’s cash value and causing your policy to lapse. If that happens, it’s likely you’ll owe taxes on the amount you borrowed.

Permanent life insurance that accumulates a cash value can provide certain living benefits, in addition to its death benefit. When you take a loan against your policy, your insurer lends you the money and uses the cash in your policy as collateral. This means that the policy’s cash value can continue to accumulate. However, it’s important to check with your insurance company how interest and any dividends will be determined and paid when you have an active loan. Policy loans can be useful financial tools, but they can also create financial turmoil. Be sure to thoroughly consider the pros and cons of life insurance policy loans in the context of your situation before taking one out.

Sources: Investopedia / Michela Buttignol, Northwestern Mutual, Internal Revenue Service

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